What really goes into your credit score and why it changes so often

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Your credit score is like this ever-elusive number that tends to move in ways you cannot understand. One month everything is in order, and then the next month your score falls, leaving you utterly bewildered. The thing is, your credit score is far from random. It is actually made up of your financial activities, which are being tracked in the background. When you truly understand how your score is determined, things become much clearer.

Your repayment history is the single greatest factor that influences your credit score. This is because it involves making timely payments on what you borrow. This includes credit cards, personal loans, education loans, and other consumer loans. Making all your EMI and credit card payments on time lets lenders know that you are someone who is dependable. Missing one payment can negatively affect your credit score, but making timely payments consistently over the years positively impacts your credit score and accounts for 35-40 percent of it.

Credit utilization looks at the amount of your credit limit used. If your total limit is Rs. 2 lakhs, and your average usage is Rs. 1.6 lakhs, it indicates to lenders that you are overstressed with your credit usage. The ideal situation would be to never go beyond 30 percent of the total credit limit, even if you are clearing the total credit each month.

A credit history that is liked by lenders is when it is long and consistent. An existing credit card account with a spotless record will do you a lot of favours because it can demonstrate how you managed your credit in the past. Closing out an existing credit card account can actually be detrimental to a score because it will shorten the length of credit provided by it.

Having multiple credit products is great for your credit score. This means you should preferably have both secured and unsecured forms of credit such as home or car loans and credit cards or personal loans. Diversification is great because it means you can handle multiple forms of credit responsibly. Having just credit cards or just one type of loan can be constraining when building the potential score.

Each time you apply for credit, the lender searches your credit report. This generates a hard inquiry. Too many of these inquiries over a short period of time can lower your score. It will appear that you are in a hurry for funds. Space out applications and apply only when necessary.

Inaccuracies in personal information, loan details, or repayment history can also impact your score. A lot of individuals seldom check their credit files, thus allowing errors to remain undiscovered. This is an element that needs regular tracking, making sure that the financial conduct is accurately reflected.

A credit score is more about patterns than it is about perfection. It is based largely on small everyday habits, things such as paying bills on time, being careful about how you spend money, and borrowing wisely. It's easy to forget about it once you start thinking of it as a reflection of everyday actions.